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WHEN VALUE COUNTS…
1ST QUARTER 2015
www.valuationservice.com
Latest Transaction Multiples from Pratt’s Stats
Private companies in the mining and
finance/insurance/real estate industry groups have
the highest values relative to their revenues,
according to the latest quarterly Pratt’s Stats Private
Deal Update (available with a subscription to the
Pratt’s Stats deal database). These industry groups
have a median selling price/revenue valuations
multiple of 1.84 and 1.13, respectively. At the low
end are firms in the retail (0.37) and construction
(0.41) industries. The table below presents the total
count of transactions in Pratt’s Stats by major
Happy New Year. We hope that you had a nice
holiday season. In the 1st Quarter 2015 newsletter,
you will find the following short articles:
 Latest Transaction Multiples from Pratt’s
Stats
 DLOM Bounces Back in Big NY Fair Value
Case
 Cap Rates Down in Senior Healthcare Market
 10 Reminders for a Successful Divorce
Valuation
 Economic Update at a Glance
We hope that you enjoy the articles. Please feel
free to call us if you need any assistance with
valuation matters. Thank you, and we look forward
to working with you in 2015.
industry group as well as median valuation
multiples. The data below include private
companies purchased by public and private
companies. There are now over 22,000 privatecompany transactions in the database.
SIC
Industry (transaction count)
MSP/Rev
0111-0971
Agric./Forestry/Fishing (531)
0.57
1011-1499
Mining (202)
1.84
1521-1799
Construction (802)
0.41
2011-3999
Manufacturing (3,786)
0.78
4011-4971
Transport./Public Util.(1,091)
0.81
5012-5199
Wholesale (1,210)
0.45
5211-5999
Retail (5,912)
0.37
6011-6799
Finance/Ins./Real Estate (883)
1.13
7011-9999
Services (7,781)
0.69
0139-9999
All Industries (22,198)
0.56
DLOM Bounces Back in Big NY
Fair Value Case
Ferolito v. AriZona Beverages USA LLC, 2014 N.Y.
Misc. LEXIS 4709 (Oct. 14, 2014)
Only a week after a New York trial court issued its
contentious ruling that KO’d DLOM (Discounts for
Lack of Marketability) in Zelouf (Zelouf v. Zelouf,
2014 N.Y. Misc. LEXIS 4341 (Oct. 6, 2014)), a
different court pronounced on the issue in another
pot-stirring fair value proceeding that featured an
“extremely successful company,” extremely
contentious business partners, and extremely wellknown valuators.
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The successful company is AriZona (of iced tea
fame), founded in 1992 by the plaintiff and the
defendant and now the largest privately owned
beverage company in the United States. Both
partners were equal shareholders but after a few
years into the business venture, they started to have
a falling out. For the good of the business, they
decided that the defendant should take control of
the day-to-day decisions. They also signed an
owners’ agreement limiting the transfer of shares in
AriZona to a designated class of transferees.
Two prominent suitors: At one time or another, two
industry giants expressed an interest in acquiring
part or all of AriZona. One was Tata, a global
conglomerate and the second largest tea
manufacturer in the world. In 2005, Tata estimated
AriZona might be worth as much as $4.5 billion, and
it came up with similar estimates over the next 10
years. But Tata never performed due diligence on
AriZona and never obtained board approval for
pursuing an acquisition.
The other suitor was Nestlé. In July 2010, it
expressed interest in buying the plaintiff’s 50%
interest for $1.3 billion conditioned on Nestlé’s
ability to conduct due diligence, to eventually
acquire the defendant’s shares, and to reach an
agreement with both partners to control the
company. After the plaintiff rejected the proposal,
Nestlé increased the offer to $1.45 billion.
Ultimately, discussions foundered. Nestlé’s board of
directors never authorized any acquisition of
AriZona. Nestlé said it was unable to obtain “good
financial data” from AriZona.
A few months later, the plaintiff, frustrated by the
transfer restriction in the owners’ agreement and
the failed attempts to sell his shares, sued for the
dissolution of the company. In return, the defendant
decided to pursue a buyout. The court’s valuation of
the plaintiff’s 50% interest drew on elements from
both sides. No expert’s analysis was the clear
winner.
As to the valuation method, both sides agreed to use
a discounted cash flow (DCF) analysis and rejected
the net asset value (NAV) approach. But the
plaintiff’s experts also advocated in favor of using a
comparable transaction analysis, albeit weighting
the resulting value at only 20% and assigning the
remaining 80% to the DCF value.
The defendant objected that the proposed
comparables were not sufficiently similar in size,
timing, and products and were “synergistic market
transactions” that the controlling case law did not
recognize. The court agreed. AriZona, it said, was
“truly sui generis, and thus any attempts to find
comparable companies are truly lacking.” Also, the
expressions of interest from Tata or Nestlé were
unreliable indicators of the value of AriZona. Neither
company had access to audited financials or was
able to do due diligence, and neither company’s
board of directors had approved an acquisition. The
only method resulting in a reliable value calculation
was the DCF, the court decided.
Liquidity risk? The parties’ experts differed on a
number of DCF components, including DLOM. The
defendant’s expert proposed a 35% rate. The
owners’ agreement was proof that the partners
could not easily liquidate their shares. The plaintiff’s
expert maintained there was no justification for a
DLOM. The company had been successful and major
companies had expressed an interest in buying part
or all of it.
The court sided with the defendant. It quickly
distinguished this case from Zelouf, in which the
court ruled against the use of a DLOM since there
was no real liquidity risk because the business at
issue probably would never be for sale. The liquidity
risk in this case was real, the court said. The stalled
Nestlé negotiations exemplified the plaintiff’s
difficulty of liquidating his shares. At the same time,
the defendant’s own expert, a recognized authority
on valuations, allowed that “smaller discounts are
often appropriate for large and growing
companies.” This described AriZona, the court said,
reducing the DLOM to 25%. The court’s “back of the
envelope” calculation suggested AriZona was worth
about $2 billion on the valuation date.
Takeaway: Expressions of interest in a company are
not bona fide offers and, by extension, are not
reliable indicators of value. Also, New York courts
continue to find a rationale for applying a DLOM in
fair value proceedings despite the questions the
recent Zelouf decision raised about the theoretical
underpinnings of DLOM.
2
Cap Rates Down in Senior
Healthcare Market
Capitalization rates have decreased significantly for
each segment of the senior care M&A market since
2013, according to recent data in The 2014 Senior
Care Acquisition Report, published by Irving Levin
Associates.
Bull market: For the four quarters ended Sept. 30,
2014, assisted living cap rates were down 70 basis
points, from 8.7% to 8.0%. They were down 60 basis
points, from 8.5% to 7.9%, for independent/assisted
living. Also, they were down 70 basis points, from
13.0% to 12.3%, for skilled nursing.
“The availability of equity and cheap debt, plus an
influx of new buyers, has been driving prices up and
cap rates down in a seniors housing bull market that
is seeing more M&A transactions than ever before,”
says the report. The average price per unit for
assisted living facilities is up 30.5%, from $150,600
to $196,600; 28.8%, from $164,000 to $211,300 per
unit, for independent/assisted living; and 7.0%,
from $73,300 to $78,400 per bed, for skilled nursing.
10 Reminders for a Successful
Divorce Valuation
Business valuations prepared for divorce purposes
are much more challenging than valuations done for
other purposes. That’s because the rules differ
among jurisdictions. There are no clear valuation
guidelines for divorce in most states. For example,
there’s no specific definition of value in state
statutes governing divorce. Also, divorce courts
exercise a great deal of discretion—even if there is
an abundance of judicial precedent (which can be
confusing and contradictory).
Regardless of this complex landscape, there are
some universal tips for valuation experts who do
divorce work—pieces of advice that apply no matter
the jurisdiction.
1. Realize that it is a litigation. The very first thing
to realize in doing a valuation for divorce is that it is
a litigation. How many times have you heard of an
amicable divorce? Virtually all are contentious,
some more than others. This is why, even though
divorce cases may be a small percentage of the
typical valuation practice, they account for a high
percentage of the times valuation experts are called
to testify as an expert witness. The valuation expert
has to conduct himself or herself accordingly,
understanding that what you say and what you do
are subject to challenge.
2. Nail down the valuation date. Very early in the
process, get a clear answer to the issue of the
valuation date. This is a fundamental aspect to
understand upfront. It could be the trial date, the
complaint date, or the date of the divorce or
separation. Most often you’re dealing with an
attorney (two attorneys if mutually agreed to or
appointed by the court). Ask them to set the stage
in terms of the valuation date—there could be
multiple valuation dates as well.
3. Know the relevant valuation standard. Because
the standard of value for divorce differs by
jurisdiction, you need a complete understanding of
the appropriate standard to use. It changes by state
and sometimes within a state (and even within
counties in states). However, while it is your
responsibility to understand what the appropriate
standards of value are, it’s not your responsibility to
choose the right one. That’s something that should
be agreed to between you and the client. Include it
in your retainer letter. Because there is sometimes
confusion as to the precise meaning of terms, make
sure that everyone understands what the labels
“fair market value,” “investment value,” and
“intrinsic value” mean.
It is not up to the valuation analyst to make the law
but to follow it. If the standard of value is clearly
entrenched in the jurisdiction, the valuation expert
should follow that standard. Otherwise, you will run
afoul of the law. If the standards are vague, you
should advise the attorneys on the vagueness of the
standard and ask their advice on what to do about
it.
4. Read prior case law very carefully. Rules for
divorce valuations vary not only from state to state,
but also by counties within some states. Therefore,
you have to read the prior case law very carefully.
It’s an area in which the case law is not well
developed. There’s no definitive case law in many
states, and in many states the courts use “fair
3
market value” when they really mean something
else because the judges just find “fair market value”
to be a convenient phrase. Also, family law courts
treat discounts and premiums differently than
courts in conventional valuation cases, so you need
to study relevant case law in this regard.
intercompany relationships between the real estate
owner and the subject company that you may be
valuing. Also, try to get a feel for whether other
assets are out there that you need to know about
for valuation purposes. If things get complicated,
consider engaging a forensic accountant.
Don’t just read articles about cases, and don’t listen
to other people’s comments about cases. Go back
and read the actual cases in the area where your
specific valuation is going to be heard. When you do
this, you will see the courts and the litigants and the
attorneys struggling with the same kinds of issues
that you will have to deal with. Each case has a lot
of moving parts, and each individual situation is very
specific in its facts and circumstances. It also needs
to be looked at in the context of the rest of the
situation that the parties are going through in their
divorce, such as support.
7. Memorialize key data. Put it in writing! This is one
of the differences between valuations for divorce
and valuations for other purposes. For example, if
you have a telephone conversation, and when you
get critical pieces of information, follow it up with a
letter to confirm. When you send information
requests to the attorneys, the litigants, and the
business owners, ask for written responses (even if
they say that what you want does not exist). Why
bother with this? This is a litigation, so you need to
cover yourself in case you are challenged in court.
5. Develop questions for both spouses. In addition
to questioning the attorneys early on, you need to
ask questions of the titled spouse and/or the
outside spouse (depending on which one is your
client and what kind of access you have). If you are
mutually agreed to or court-appointed, you can
expect to speak with both parties. Sometimes it’s
informal and sometimes more formal, through
depositions or interrogatories through the
attorneys.
From the titled spouse, your questions should be
designed to collect information about the business,
the type of entity, and the kind of business
information that you’ll need, such as financial
information and qualitative and quantitative
information. From the nontitled spouse, you should
ask questions that explore that person’s perspective
and to raise any concerns or issues early on in the
process so that you can address them as the case
moves forward.
6. Get a list of entities involved. Ask for a list of the
entities and the types of ownership of the entities,
the ownership by the parties to the divorce, a brief
description of the overall situation, and the number
of companies involved. For instance, is the real
estate owned by another entity that is leased to the
subject company? While you may not be directly
involved in valuing that real estate entity, you would
want to make sure that you are consistent in terms
of the lease payments and other aspects of the
8. Be prepared to teach. Because of the small
amount of case law developed, divorce courts tend
to be not as cognizant of business valuation theory
and methodology as other courts. Divorce courts
hear so many different issues that it limits the depth
they consider when they have to deal with business
valuations.
9. Carefully manage your time and cases. With a
divorce valuation engagement, you’re generally not
in control of your own schedule. It’s not unusual to
get a call at the last minute about various deadlines
or court appearances. This can be a big problem
unless you manage your time and your cases
appropriately.
10. Watch your fees. In divorce work, you’re being
paid by individuals, not company clients or law
firms. And these individuals are shelling out a lot of
money in connection with the divorce, so it often
places an absolute ceiling on what can be charged.
Sometimes you are working for the out spouse, and
money is a problem. Many valuation experts will not
take a divorce case without a retainer and an
arrangement to be paid monthly. It’s uncommon to
charge above and beyond the retainer because the
client views the valuation expert as a necessary evil
and once the report is delivered or you have
testified in court, the client has no use for you, so
payment could become a very serious problem.
Final thought: There are other issues you’ll
encounter in a divorce engagement, including buy4
sell agreements, non-compete covenants, goodwill,
and the double dip. Therefore, you should be fully
versed on these issues. Also, the lack of objectivity
appears to be more prevalent in family law matters
than in other types of cases. Therefore, the
valuation expert must take extra care to avoid any
pressure toward bias in favor of the client.
Economic Update at a Glance
U.S. economic growth continued in the third quarter
and exceeded economists’ forecasts, as GDP rose at
a rate of 3.5%. Further, the second-quarter GDP rate
was revised upwards to 4.6%. Consumer spending
and business investment rose in the third quarter,
though at a decelerating rate from the prior quarter.
Government spending accelerated sharply,
particularly defense spending, and imports
declined. Final sales (GDP with inventory changes
removed) grew more quickly than overall GDP, at a
rate of 4.2% in the third quarter, matching its best
performance since 2006.
The combined GDP growth of the second and third
quarters made for the best six-month growth in the
U.S. economy in over a decade. In addition, GDP
growth in the third quarter of 2014 marked the
fourth quarter out of five that the economy has
expanded at or above a 3.5% rate. The Economic
Policy Institute attributed some of the impressive
six-month GDP growth to the fact that the economy
rebounded after contracting in the first quarter of
2014. The Economic Policy Institute pointed out that
the average growth rate is only 2.0% for the first
three quarters of 2014, which it finds in line with
previous recovery years. As a result, it believes that
it is still too early to declare that the recovery has
shifted into high gear and that it would be
premature for policymakers—particularly the
Federal Reserve—to ratchet down support for a full
recovery.
Several large news outlets, including Bloomberg,
Thomson Reuters, and The Wall Street Journal, all
commented that much of the third-quarter GDP
growth came from increased government spending
and a shrinking trade deficit, while consumer
spending, which has driven much of the economic
recovery, decelerated. Some outlets noted that a
couple of items benefiting growth in the third
quarter were unlikely to be consistently repeated,
namely heavy defense spending and a decline in
imports, causing them to doubt whether growth
could be sustained. Others pointed out that
declining gas prices and accelerating job growth,
which may lift wages, could prove to be tailwinds for
consumer spending in the fourth quarter.
The Federal Reserve further tapered its bond-buying
program in the third quarter, finding that the
economy continued to have a sufficient level of
underlying strength to support ongoing
improvements in labor market conditions. If the
information received at its next meeting supports
the expectation of improved labor market
conditions and inflation returning toward its longerrun objective, the Federal Reserve stated that it will
end its current program of asset purchases.
The Federal Reserve continued to keep its target for
the federal funds rate near zero, as it kept an eye on
the labor market and inflation. The Federal Reserve
went on to state that it likely will be appropriate to
keep its target for the federal funds rate near zero
for a “considerable time” after the asset purchase
program ends.
The Federal Reserve's Beige Book, a summary of
economic conditions in each of its 12 regional
districts, stated the U.S. economy grew at a "modest
to moderate" pace from mid-August through
September. The report found that growth was
moderate in the Midwest and West districts, but
more modest in the South and Northeast. The Beige
Book also noted that consumer spending had been
"slight to moderate," though most districts were
optimistic about their growth prospects because
they expect a pickup in retail sales over the coming
months. The report also noted that, generally,
nonfinancial
services
strengthened
and
manufacturing activity increased, but residential
construction and real estate remained mixed.
Improvements in the labor market continued at the
same pace as they had in the previous report.
5
The Conference Board reported that the Leading
Economic Index continued its upward trend in
September and signaled that the U.S. economy will
continue expanding into 2015. Nine of the 10
leading indicators advanced in September. The
Leading Economic Index has now increased in 12 of
the last 14 months.
conditions was the main contributor to the rise. The
survey found that more business owners felt better
about their current financial condition and reported
that their company’s revenues have increased, cash
flow over the past 12 months was at a six-year high,
and the ability to obtain credit over the past 12
months improved significantly.
The Consumer Price Index rose in September, as
rising food prices offset declining energy costs. The
Producer Price Index edged down in September, as
both the index for final demand services and the
index for final demand goods declined.
Large-cap indexes had modest gains in the third
quarter, but the midcap and small-cap indexes fell,
with the Russell 2000 moving into negative territory
for its year-to-date return. August was the standout
month this quarter, and sell-offs occurred in July
and September. Performance across the S&P 500
sectors varied.
Total retail sales fell in September for the first time
since January, when severe winter weather kept
shoppers at home. Sales were weak across most
segments including clothing stores, auto dealers,
building supply stores, and furniture stores. The
core retail sales figure—which excludes volatile
automobile and gasoline sales—also declined, albeit
less than total retail sales. Despite the September
decline, retail sales continue to trend upward.
The pace of job creation accelerated sharply in
September, and job gains in July and August were
revised upwards. The unemployment rate declined
to 5.9% in September, its lowest figure since March
2008. Average hourly earnings for private-sector
workers ticked down slightly, while the average
workweek edged up.
After hitting a near seven-year high in August, the
Conference Board's Consumer Confidence Index
retreated in September. The survey found that
consumers were less optimistic about the outlook
for the economy and labor market conditions.
The Thomson Reuters/University of Michigan’s
Index of Consumer Sentiment rose in September to
its second highest level in seven years. Consumers
reported believing that the economy has improved
and will continue to improve over the next year.
The
Institute
for
Supply
Management’s
manufacturing sector index declined in September
after last month’s reading put the index at its
highest level since March 2011. Regardless, the data
indicated that the manufacturing sector expanded
for the 16th consecutive month and the overall
economy has now grown for the 64th consecutive
month. The Institute for Supply Management noted
that, based on the historical relationship between
its manufacturing index and GDP, if the September
index reading were annualized, it would correspond
to a 4.0% increase in real GDP annually.
The Institute for Supply Management’s index for the
services sector slipped in September, after August’s
reading put the index at its highest level since its
inception in January 2008. Despite the September
retreat, respondents to the survey indicated that
they remain optimistic about business conditions
and the overall direction of the economy. The
September index reading indicated that the services
sector has now grown for the 56th consecutive
month.
The National Federation of Independent Business
reported that the Small Business Optimism Index
edged down in September. The two components
that fell the most drastically were the components
for job openings and for planned capital outlays.
The Federal Reserve reported that industrial
production rose 1.0% in September, its largest gain
since November 2012, and was up 4.3% from one
year ago. The manufacturing output of durable
goods and nondurable goods rose, as did the output
of utilities and mines. Capacity utilization advanced
in September and was 1.0 percentage point above
its level from a year ago.
The 3Q 2014 Wells Fargo/Gallup Small Business
Index rose to its highest level in more than six years.
Business owners’ assessment of their current
The National Association of Realtors reported that
existing-home sales rebounded in September, after
dipping in August, to their highest level thus far in
6
2014. Despite this, sales are still below their level
from one year ago. Home price appreciation
continues upward, though the increases have
moderated.
Housing starts and building permits authorized rose
in September and remain above their levels from
one year ago. Total spending on both private
construction and public construction during the first
nine months of 2014 was above the amount spent
during the same period in 2013.
The National Association of Home Builders/Wells
Fargo Housing Market Index continued to advance
in September and remained at a level indicating that
more builders view sales conditions as good, rather
than poor. The report found that a strengthening
job market and pent-up demand for new homes
have contributed to a gradual, upward trend in
builder confidence.
The National Association of Realtors’ Realtors
Confidence Index for current conditions fell in
September, with realtors believing that the market
for single-family homes dropped from “strong to
moderate” down to “moderate,” and townhouses
and condos continued to be viewed as “weak.”
Note: This newsletter does not constitute legal, valuation, tax or any other type of consulting advice. It is offered as an information
service to our clients and friends. For specific legal and accounting issues, it is advisable to seek professional advice. We welcome
the opportunity to discuss any specific valuation issues that you may have.
Valuation Services, Inc. (VSI) is one of the premier business valuation firms based in the Washington, DC area that
specializes in valuing private, closely-held businesses. We have valued private entities owning real estate and operating
businesses with hundreds of thousands to billions of dollars of asset value. In addition, VSI has valued other assets like
intangible assets, notes receivables, law suit claims, tenant-in-common interests, and large blocks of publicly traded stock.
VSI has a staff of professionals that prepares and supports valuations on
a full-time basis. Our team of professionals handles various types of
valuations and has a history of successfully defending as expert witnesses
before the IRS and in many different courts. Our valuations are used for
a variety of reasons—i.e., estate planning and administration, ESOPs,
litigation support, succession planning, mergers and acquisitions,
bankruptcy, financial reporting, and Section 409A.
For more information please contact:
Craig Stephanson, CPA, CVA
Managing Director
571-447-5401
[email protected]
Jeff Bae, JD, CVA
Managing Director
571-447-5402
[email protected]
Tom De Filippe
Managing Director
917-710-8492
[email protected]
3000 Wilson Boulevard, Suite 220  Arlington, VA 22201  (571) 447-5400
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